Ex-Citadel Trader Facing Perjury Charges

Mikhail Malyshev, former head of Citadel Investment Group's high-frequency trading team, is in trouble deep. He has been indicted for perjury and was freed on $100,000 bail. Malyshev lied about destroying evidence in an affidavit and testimony in a lawsuit accusing him and two other former employees of violating a non-compete agreement.

Malyshev departed Citadel to found Teza Technologies, a high-frequency trading firm. He admitted in testimony that he destroyed incriminating evidence on his computer after first denying doing so on purpose. He said he scrubbed his computer for a few minutes to remove pornography, but evidence proved he scrubbed for two hours. At that point, Malyshev broke down and admitted what he did.

Malyshev will return to court on April 7 to face the two counts of perjury.

Eric Bank, Freelance Writer

McKinsey Director Kumar Testifies Against Rajaratnam

Jurors heard yesterday from Anil Kumar that he was recruited by Galleon founder Raj Rajaratnam in 2004 through an improper direct cash payment that bypassed Kumar’s employer, McKinsey & Co. Kumar received $500,000 a year from Galleon to provide insider tips.

Rajaratnam used a third party and a Swiss bank account that was invested in Galleon’s funds. The account was registered to Kumar’s housekeeper.

"Once I accepted the money he got quite specific about what a company's financial performance was," Kumar said. "He was asking me for a variety of information such as what is a company's profit, their revenue, how they are doing in that quarter, if they had strategic plans. He kept asking me. I didn't always know the answer but I felt that since I accepted the money, I had a sort of obligation to him."

Kumar has already pleaded guilty in the case, and is now cooperating with prosecutors. He got to know Rajaratnam at University of Pennsylvania's Wharton School in the early 1980s. Kumar tried to recruit Rajaratnam for McKinsey, but Rajaratnam turned the tables on him and began a corrupt relationship.

"I'd much rather have you as a consultant, not McKinsey," Kumar was told by Rajaratnam. Rajaratnam said to Kumar "I know you will not remember to keep a list of ideas if you don't get money from me."

Jurors also heard the first wiretap at the heart of the prosecution’s case. Kumar was heard telling Rajaratnam about a transaction involving Advanced Micro Devices (AMD). Kumar said: "They've shaken hands. You can now just buy … You cannot go wrong. There will be such a boost from this announcement" when Rajaratnam asked whether to buy a million shares.

Two other tapes were played as Federal Bureau of Investigation Special Agent Diane Wehner was on the stand. The conversations separately involved Rajaratnam receiving inside information from former Galleon trader Adam Smith and former Intel employee Rajiv Goel, who discussed a PeopleSoft deal. Smith is a cooperating witness and Goel has already pleaded guilty in the case.

John Dowd, Rajaratnam's lawyer, pounced on the Goel tape, noting that the phone call occurred two months after the PeopleSoft deal had been announced. 

Gupta Leaves Rajaratnam Private Equity Firm

Former head of McKinsey & Co Rajat Gupta is another accused Rajaratnam tipster. He also co-founded New Silk Route Partners (originally called Taj Partners) with Rajaratnam in 2006. He is now leaving the $1.4 billion partnership amid his involvement in the Galleon insider trading case. New Silk is not accused of any wrongdoing in the matter.

The SEC has accused Gupta of passing information to Rajaratnam regarding Goldman Sachs and Proctor & Gamble. Gupta is expected to give evidence against Rajaratnam at the blockbuster trial. Gupta maintains his innocence in the matter.

Eric Bank, Freelance Writer

Sparks Fly at Opening of Rajaratnam Trial

Raj Rajaratnam

A newly empanelled jury heard opening statements yesterday at the blockbuster trial of Galleon Group founder Raj Rajaratnam. 

First up was Assistant U.S. Attorney Jonathan Streeter. In harsh language, he told the jury that Rajaratnam had repeatedly engaged in insider trading since 2003. Streeter quoted from one of the hundreds of wiretaps central to his case, in which Rajaratnam is heard telling employees "I heard yesterday from somebody who's on the board of Goldman Sachs that they're going to lose $2 a share." Streeter pointed out that the tip saved Galleon millions of dollars.

Rajaratnam "exploited a corrupt network of people" in order to prosper illegally, Streeter said.

"The evidence will show that at Galleon, people did their homework but they cheated, too. At Galleon, people did legitimate research, but they cheated, too, and that cheating is called insider trading. Greed and corruption: That's what this case is all about," Streeter said.

Streeter added that Rajaratnam evidenced a guilty mind when he told his cronies to "trade stocks in a way that would hide" their wrongdoing.

Jurors were then treated to a completely opposite viewpoint from defense attorney John Dowd, who called the prosecution gullible for believing in the self-serving statements of their witnesses.

"The evidence will show the government has it wrong," John Dowd said. "And the government has it wrong because it believed the word of unbelievable people."

Dowd blasted the prosecution’s case and witnesses, even Rajaratnam’s former mistress Danielle Chiesi, who has plead guilty but is not a government witness. He said she was all "talk, gossip and exaggeration" who was trying to "impress others and insinuate herself."

Dowd then painted Rajaratnam as hard-working and honest.

"The information Raj gathered was available to anyone willing to work hard," Dowd claimed. Galleon's team "would analyze a company's published statements and regulatory filings as well as media reports. Talking to corporate executives is what Raj did for a living. It's what investors hired him to do. The evidence will show that Raj did not cheat," Dowd said.

Jurors also heard about a third employee of McKinsey & Co. to be implicated in the case, following after partner Anil Kumar and former chief Rajat Gupta. The unnamed employee was heard on a phone call with Rajaratnam and his brother talking "about plotting to get inside information from a consultant at McKinsey." Rajaratnam described the employee as dirty. Apparently Rajaratnam offered the employee’s wife a job at Galleon.

Today’s first prosecution witness will be FBI Special Agent Diane Wehner.

Eric Bank, Freelance Writer

Another Expert Network Firm Implicated in Insider-Trading Case

William Galvin

Mirroring the sprawling probe of expert-network firm Primary Global Research, in which eight people have already been charged, another case involving an expert firm, Guidepoint Global Consultants, has led to new charges.

William Galvin, the Massachusetts Secretary of the Commonwealth, has filed a lawsuit against James Silverman of Risk Reward Capital Management (RRCM) alleging insider trading based on tips from Guidepoint Global. So far, Guidepoint has escaped accusations of wrongdoing and the identities of the tipsters have not been divulged.

Silverman is accused of profiting from tips that he used for his $24 million RRCM Bio Fund. The fund had been a big loser in 2008, but had phenomenal gains of over 50% in each of the last two years. The insider tips involved drug trial information from Ariad Pharmaceuticals and Questor Pharmaceuticals, located in Massachusetts and California, respectively.

"With access to Guidepoint, the fund began a dramatic resurgence," the lawsuit charges. "These returns were generated, at least in part, upon Silverman's receipt of material non-public information he received through Guidepoint consultants. Silverman apparently also knew that he should not have received this information, as he deleted his notes containing the study results prior to producing them to the [Securities] Division in response to its subpoena." 

Guidepoint says it is fully cooperating with the probe. Smart boys!

Eric Bank, Freelance Writer

Couple Wins Big Award from Morgan Keegan

Bernard Madoff

Repercussions from the Bernie Madoff case continue. The latest is a $265,000 arbitration settlement against Morgan Keegan awarded to Jeffrey and Marisel Lieberman, whose money Morgan Keegan invested in a Madoff feeder fund.

The Financial Industry Regulatory Authority (FINRA) panel called Morgan Keegan “grossly negligent” in its decision. FINRA stated that “there is clear and convincing evidence that Morgan Keegan was grossly negligent in not performing substantial due diligence and as a result it fraudulently misrepresented the risk of this investment."

The Liebermans invested $200,000 with Morgan Keegan, and all the money was deposited into the Fairfield Greenwich Group hedge fund, a conduit to Madoff’s Ponzi scheme. This, despite the Liebermans’ written aversion to speculation as an investment objective. 

Besides restitution, Morgan Keegan was ordered to pay the Liebermans $65,000 in damages and court costs. The Liebermans’ financial advisor, Julio Almeyda, was cleared of all charges.

Eric Bank, Freelance Writer

Connecticut Ponzier Guilty of Fraud

Francisco Illarramendi

Score another victory against hedge fund crime for federal prosecutors. Yesterday, fund manager Francisco Illarramendi pleaded guilty to fraud and conspiracy charges in federal court in Bridgeport, Connecticut. The U.S. Attorney, David Fein, has also charged two Venezuelans as co-conspirators in the Ponzi scheme.

The two men, Juan Carlos Guillen Zerpa and Juan Carlos Horna Napolitano, allegedly tried to obstruct an investigation into Illarramendi’s Michael Kenwood Group fund by the Securities and Exchange Commission. They are both behind bars, having been denied bail.

Apparently, the two men concocted a phony accountant’s letter attesting to $275 million in non-existent fund assets. The going rate for the forgery was $3 million.

Illarramendi centered his Ponzi efforts in his Short Term Liquidity Fund, which had over half a billion dollars under management. The scheme, dating back to 2006, saw Illarramendi stealing over $50 million for personal use. He also funneled the money to other businesses he ran.

Illarramendi was initially sued by the SEC in January 2011. He could be spending up to 70 years in the Big House. His two buddies are each up for a quarter (century) fabricating license plates.

Fein released a statement declaring "We believe this case represents the largest white-collar prosecution ever brought by this office.”

UPDATE
The SEC has now charged Illarramendi with civil fraud for his Ponzi scheme, which was worth hundreds of millions of dollars. "Illarramendi knew the SEC was on to his scheme and compounded his fraud by attempting to mislead the Commission's staff," said David Bergers, head of the SEC's office in Boston.


Eric Bank, Freelance Writer

Galleon Fugitive Living in India

Deep Shah

Deep Shah has the distinction of being the sole fugitive from the Galleon Group insider-trading case that features Raj Rajaratnam as its central figure.

Mr. Shah was located in Mumbai, according to the Securities and Exchange Commission. The one-time Moody’s analyst has been charged with selling (for $10,000) inside information to admitted tipster Roomy Khan, a key witness against Rajaratnam. The tip involved the takeover of the Hilton Hotels by the Blackstone Group, and also information regarding Google.

The fraud charges against Mr. Shah stem from late 2009, but Shah had been living in India before the indictment. We know this because the Wall Street Journal interviewed Shah one month before the charges were filed. In the interview, Shah denied wrongdoing. He is the only charged individual who has yet to respond to the charges.

Shah was located in Mumbai, India by a local bailiff, who attempted to serve him with legal papers. Mr. Shah is apparently living in high style on the beach in the Juhu community, but was not found at his home by the bailiff.

"He was not found on my enquiries with his servant," the bailiff said. "I was informed the defendant had gone out and no fixed time to be determined."

Rajaratnam to Testify

Separately, the WSJ reports that Galleon founder Rajaratnam wants to testify on his own behalf at the insider-trading trial that starts today. The final decision will probably rest on whether Rajaratnam feels he needs to respond to the damaging taped phone conversations that are the centerpiece of the prosecution’s case.

Rajaratnam’s appearance on the stand will likely be the center ring of the Galleon three-ring circus of a case, which will likely go on for two months.

Today marks the beginning stages, in which a jury is picked and lawyers deliver opening statements. FBI special agent Diane Wehner and former McKinsey partner Anil Kumar are expected to be the first two witnesses for the prosecution. Kumar has already pleaded guilty to passing along insider tips to Rajaratnam regarding Advanced Micro Devices (AMD).

Two unindicted co-conspirators will play major roles in the trial. The first is Rajat Gupta, former managing partner of McKinsey. The other co-conspirator is Rengan Rajaratnam, Raj’s brother. Neither has been formally charged with any wrongdoing.

Last Friday, Assistant U.S. Attorney Jonathan Streeter argued to the court that

"Mr. Gupta is a conspirator with Mr. Rajaratnam to share insider information about Goldman. The government intends to submit evidence that there is such a conspiracy. The government is going to show that on at least two occasions, Mr. Gupta attended Goldman Sachs board meetings and within literally minutes of attending those meetings, he called Mr. Rajaratnam."

U.S. District Judge Richard Holwell agreed with Mr. Streeter that tapes of both men talking with Rajaratnam would be allowed at the trial, despite charges of a “smear campaign” by defense lawyers.

Streeter charges that Gupta told Rajaratnam of an impending investment in Goldman Sachs by Berkshire Hathaway. Rajaratnam was later recorded saying that  "he was told by a board member at Goldman Sachs that Goldman Sachs was losing," at which point Galleon sold off its stake in Goldman.

Eric Bank, Freelance Writer

Two F/X Firms Accused of Fraud

William Galvin

Regulators from the State of Massachusetts last week filed charges against Eagle Trades and Osiris FX for failure to pay redemptions and other possibly fraudulent practices. The charges were filed by Secretary of the Commonwealth William Galvin, who also charged the two firms of operating in the state without first registering. The two charged firms have onshore and offshore business units.

"In these uncertain economic times, it is tempting to range far and wide in search of better returns, but the searchers can fall prey to schemes that flourish in just such times," Galvin said. "Improbable rates of return, while attractive, are red flags adorning scams."

As evidence, Galvin revealed documents showing promises made by Eagle Trades two years ago of promised six-month returns of nearly 300%. The documents were handed out at an investor meeting also attended by Osiris FX. Eagle is said to have almost $1.7 million under management.

Individuals were also charged by the state: Glenn Manterfield, Evan Andersen, and Alberto Sciola from Osiris FX and Terrance Osberger from Eagle Trades. Andersen had previously been barred from the Massachusetts securities industry after he and Manterfield were accused of defrauding investors in the Lydia Capital hedge fund, which they ran until its downfall in 2007. The Securities and Exchange Commission also participated in the earlier charges.

"These two cases also highlight the importance of investors' checking on those who would sell them securities," Galvin said. "A call to the Securities Division can establish if a person or firm is registered to do business in Massachusetts. In the Osiris matter, a caller to the Securities Division would have discovered the sanctions against Manterfield and Andersen."

Eric Bank, Freelance Writer